MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JUNE 21, 1998 (1)
MARKET OVERVIEW
Toronto Stocks Defy New York's Tumble
Toronto stocks avoided a downdraft in New York and closed in positive territory on Friday. Bargain-hunting in Canada's battered gold and base metals sectors rescued the Toronto Stock Exchange from the red as renewed worries about Japan walloped New York's benchmark index.
The Toronto Stock Exchange's benchmark 300 composite index rose 15.12 point, a meager 0.21 percent, at 7153.39 points. Volume was uncommonly heavy at 142.3 million compared to 95.1 million shares on Thursday. Trading value was worth C$3 billion, the third largest trading value in history. The strong turnover was due to triple-witching, the quarterly expiry of options, futures and options on futures. For the week, the TSE 300 fell 157.53 points, or 2.2%. Advancing issues outpaced declines 494 to 464 while 301 closed flat.
By comparison, the Dow Jones Industrial Average in New York dropped 100.14 points or 1.14 percent to 8712.87 points. For the week, it fell 122.07 points, or 1.4%
"All of the commodities are trying to find a new base," said Pat Blandford, senior vice-president at Midland Walwyn Capital Inc. in Toronto. "Remember the old line: `It's been down so far it looks like up to me.' Well, that's what it's like. This has got to be a bargain, they've been beat up so much, and they're still alive."
Toronto's 14 subsectors divided into two teams with exactly seven on each side.
Mining and metals stocks led the TSE higher with a gain of 2.50 per cent on the day, and managed to earn second place in the weekly contest with a gain of 1.47 per cent. Alcan Aluminum gained $0.70 to $39.90, Cominco Ltd. was up 65 cents to $21.00 and Noranda Inc. gained 80 cents to $24.50.
The gold and silver sub-group was next, up 2.01 per cent Friday and 2.14 per cent higher for the week, making the sub-index the strongest gainer over the last five days of all 14 sub-groups. The gold subindex got a boost from a US$6.20 jump in the gold price on the Comex division of the New York Mercantile Exchange to US$299 an ounce. "Looks like a positive move here in Toronto," said Fred Ketchen, ScotiaMcLeod's director of equity trading. "The highlight of the TSE today was in the gold sector." In the group, Barrick Gold Corp. gained 50 cents to $26.60, Franco-Nevada Mining gained 25 cents to $26.25 and Placer Dome Inc. was up 20 cents to $16.50. TVX Gold Corp. (TVX/TSE) closed up 25› at $4.75 after Goldman Sachs & Co. initiated coverage of the stock with a market perform rating. Gold shares were boosted by an overnight slip in the U.S. dollar against the recovering Japanese yen, which prompted investors to jump into gold bullion. "Gold seems to be looked upon today as some kind of a hedge against that kind of problem," Ketchen said.
The industrial products group was the third-best group on the day, up 0.68 per cent, but remained near the bottom of the poorest weekly performers with a five-day loss of 4.32 per cent. The reason for the industrial products group's abysmal weekly performance was Northern Telecom, which took a beating over its $9.1-billion US purchase of California-based Bay Networks. Nortel closed up 15 cents Friday at $77.85. Newbridge Networks climbed $1.15 to $33.15, while Bombardier Inc. A shares were up a nickel at $57.80. Among other industrials, Geac gained $2.35 to $46.35, Cameco Corp. moved $1.70 to $38.70.
Among mines, Falconbridge climbed $0.75 to $17.00.
Takeover rumors pushed Midland Walwyn Inc. , Canada's last big independent brokerage, to a new 52-week high of $28.00, although it ultimately closed up $1.25 to $27.25. The possible acquisitor named in Friday's speculation was Merrill Lynch & Co Inc. The TSE even asked Midland to make a statement and quell the rumors, but the firm opted to make no comment.
On the negative side, the TSE 300's transportation sub-group was the lowest on the day with a 0.78 per cent loss, followed by utilities, down 0.65 per cent, and pipelines, off 0.64 per cent.
Toronto's oil and gas subindex came under some pressure Friday, ending down because of the continued low oil prices. The Toronto Oil & Gas Composite Index fell 0.1% or 4.93 to 5798.53. Among sub-components, the Integrated Oil's fell 1.3% or 104.34 to 8109.62. The Oil & Gas Producers Index gained 0.5% or 24.83 to 5100.01 and the Oil & Gas Services Index fell 0.4% or 10.50 to 2384.63.
For the week, the TSE Oil & Gas Composite Index fell 2.0% or 117.17 points. The Integrated Oil's fell 3.0% or 246.58 points. The Oil & Gas Producers fell 1.5% or 76.86 points. The Oil & Gas Services fell 2.5% or 60.77 points.
Gulf Canada Resources, Renaissance Energy, Petro-Canada Talisman Energy, Poco Petroleums and Pinnacle Resources were among the top 50 most active traded issues on the TSE. Service related issues were not represented in this listing.
There were no oil's or service related issues listed among the top net gainers on the TSE. However, all those which made the most active list either gained or remained unchanged.
Suncor Energy fell $1.25 to $46.75 and Seven Seas Petroleum (u) $1.20 to $19.05.
Among service related issues, Ensign Resource Services fell $0.70 to $24.40 and Mullen Transportation $0.50 to $20.50. Canadian Fracmaster Ltd. (FMA/TSE) closed down 40› at $9.45 after lowering its earnings forecast for 1998 to between 50› and 85› a share, due to the outlook for oil prices. In May, the company said it expected earnings of between $1.15 and $1.70 a share in 1998, compared with $1.01 a share in 1997.
The utilities group was the week's worst with a loss of 5.20 per cent, followed by industrial products and transportation, down 2.76 per cent.
Air Canada slipped 10 cents to $12.75; Canadian National Railway lost a nickel to $79.40 and BCE Inc. was down 45 cents to $60.00.
The banking group closed down 0.22% as Royal Bank of Canada (RY/TSE) eased 50› to $86.
Norm Duncan, a broker with C.M. Oliver & Co., said there's probably still some weakness to come next week in the equities market. He said he sees the TSE 300 moving sideways with a negative bias.
In other Canadian markets, the Montreal Exchange market portfolio index eased 0.38 of a point to 3647.89, making for a drop of 117.66, or 3.1%, on the week.
The Vancouver Stock Exchange composite index added 4.04 points, or 0.8%, to 538.38 on Friday for a loss of 10.48 points, or 1.9%, for the week.
The Alberta Stock Exchange combined value Index rose 9.45 points Friday, or 0.1% to 2109.61. For the first time in days, advancing issues outnumbered declining issues, 146 to 137. 124 issues remained unchanged.
Anvil Resources, First Star Energy, AltaPacific Capital, Q Energy, Draig Energy, Raptor Capital, ox Energy and HEGCO Canada were among the top 25 most active issues on the ASE.
Draig Energy gained $0.59 to $1.94, Solid Resources $0.15 to 7.05, First Star Energy $0.11 to $0.83, Sator Capital $0.11 to $0.46, Proprietory Energy $0.10 to $3.90 and Q Energy $0.10 to $0.36.
On the downside, Red Sea Oil fell $0.20 to $1.50, Belfast Petroleum $0.15 to $2.05, Ionic Energy $0.15 to $1.40, Derrick Energy $0.10 to $1.80, HEGCO Canada $0.10 to $2.50, Niko Resources $0.10 to $4.50 and Total Energy Services $0.10 to $1.80.
Canadian bonds ended weaker on Friday, but recovered most of the losses made earlier in the day as a mini rally in the U.S. dollar boosted sentiment for North American bonds. U.S. treasuries jumped in afternoon trade following the U.S. dollar's rebound against the yen on comments by U.S. Treasury Secretary Robert Rubin.
Seeking to reduce high expectations in the market for a Group of Seven (G7) solution to Japan's economic problems, Rubin said there will be no policy actions from a meeting of G7 deputy ministers in Tokyo this weekend. "We have said from the very beginning there will not be policy actions," he told Reuters in an interview on Friday.
Deputy U.S. Treasury Secretary Lawrence Summers, after rounds of crisis meetings with Japanese policymakers in Tokyo this week, also met his G7 colleagues to discuss challenges facing the Japanese and other Asian economies. Japan has the daunting task of regaining investor confidence by reforming its inefficient banking system and trying to stimulate its economy before Asia plunges further into economic downturn.
"These are complex problems ... They developed over a long period of time and they may well take time to go through and develop and implement the programs," Rubin said.
In earlier trade, a fall in the U.S. dollar to 134 yen on Friday after a rebound to 138 yen on Thursday was pressuring down U.S. treasuries.
U.S. bonds have gained sharply in recent weeks from the notion that crises in Asia and Russia would continue to push global capital to U.S. dollar assets, which offer safe-haven protection.
Canada's benchmark 30-year bond fell C$0.07 to C$135.81 to yield 5.510 percent.
Its U.S. 30-year counterpart rose 16/32 to yield 5.68 percent. The U.S.-Canada spread narrowed to 17 basis points from 20 points at the previous close here.
As the U.S. dollar was forging ahead against all major currencies until Washington and Tokyo staged a rare joint intervention on Wednesday, the Canadian dollar was not alone in falling.
But on Friday the Canadian dollar didn't rally when the yen rallied, and currency dealers are asking themselves what will happen to the Canadian dollar when the yen goes back down to 145 yen to the U.S. dollar.
This weakness can spill into Canadian bonds.
"Right now the Bank of Canada has really got its back up against the wall," said Jeoff Hall, managing Canadian market analyst at Technical Data in Boston. "There was a lot of consideration given to today being the day when the Bank of Canada would hike rates, and it didn't happen, so the Canadian dollar was an easy target for sellers."
"I don't think it's a long-term phenomenon, but as we get into next week, Monday and Tuesday, I think that the rate vigil gets earnest," he said.
Hall said he did not agree with a rate increase at this stage is needed to boost the Canadian dollar, but added that could be "a necessary evil."
"To be consistent with their prior action and words, then certainly it looks like a rate hike would justified," he said.
Canada's dollar has been under pressure from weak prices for commodities, a pillar of the nation's exports, and from capital flows into safer and more attractive U.S. assets, which provide higher returns than Canadian bonds.
The Bank of Canada said on Friday its monetary conditions index (MCI) fell to -5.63 from -5.61 a week earlier. The MCI has been on the downtrend for the last two months.
Canada's May consumer price index (CPI), released on Friday, was above the consensus forecast.
Overall CPI rose 1.1 percent year on year in May after a 0.8 percent rise in April, and the core rate (ex-food and energy) rose 1.4 percent from a year earlier after a 1.2 percent rise in April.
Economists on average had predicted a rise of 0.7 percent in all items year on year, and an increase of 1.2 percent in the core rate.
"I think what we are seeing is a transitory price increase, certain areas stemming from the weaker Canadian dollar and one area, specifically, the travel accommodation cost. That is due to increased tourism from the U.S.," said Sal Guatieri, senior economist at Bank of Montreal.
The U.S. dollar's gain versus the Canadian dollar in recent months gives Americans higher purchasing power in Canada.
"(There's) no increase in underlying price pressures. Goods inflation on a year-on-year basis is still very subdued. Even services inflation was quite tame," he said. "That of course is reflecting an ongoing slack in the economy and falling commodity prices."
Mark Mullins, chief economist at Midland Walwyn Capital Inc., said the business travel cost, natural gas and food prices contributed to the higher inflation rate.
"I think we going to find this more a one-off factor than a new trend. I think we're still going to see the numbers basically below one percent annualized for the next few months," he told Reuters Television.
On whether higher-than-expected CPI would justify an interest rate hike by the Bank of Canada for supporting the Canadian dollar, he said: "We are dealing with the situation here in Canada where there is a very high degree of uncertainty. And it's more international than domestic. The (central) bank has recently reduced its forecast for economic growth. So I don't think they are in any great rush to raise rates.
The money market was steady to a bit weaker as the Canadian dollar remained under selling pressure.
It is also watching for any G7 comments on Japan and Asia.
Canada's inflation rate, as shown in the CPI, is still in a good range and there's no extreme worry that the central bank would be forced to raise interest rates, one trader said.
"I don't think the market really expects the bank to (raise rates now), just keeping a wary eye on it," he said. "We're just sitting here on the edge of what's happening.
Canada's three-month when issued T-bill traded with a yield of 4.85 percent, compared with 4.84 percent at the previous close here.
The Canadian dollar was moving between C$1.4732 (US$0.6788) and C$.4670 (US$0.6817) in choppy trade on Friday.
The Bank of Canada holds a T-bill auction next Tuesday, which comes in every two weeks.
Inflation Edges Up In May
The consumer price index made its biggest month-to-month splash of 1998 in May but the resulting annual inflation rate of 1.1 per cent suggests a tempest in a teapot rather than a new tide of inflation.
Seasonally adjusted, inflation was up 0.3 per cent from April's annual rate of 0.8 per cent, Statistics Canada said Friday. That was a bigger hike than economists had expected.
But most observers were quick to downplay the significance of the report.
Sharply rising costs for traveller accommodation in May were behind much of the month-to-month inflationary pressure, while on an annual basis there were higher prices for fresh vegetables, telephone services, restaurant meals, tuition, tobacco products and natural gas.
"The increase in annual May CPI inflation numbers appears to reflect isolated, transitory price increases rather than widespread, underlying price pressure," said Sal Guatieri, senior economist at the Bank of Montreal.
With the Canadian dollar at historic lows, analysts sift the economic tea leaves following each fresh economic indicator, searching for clues as to where the Bank of Canada will move interest rates. The central bank has a standing inflation target of between one and three per cent.
On that front, Mario Angastiniotis of MMS Standard and Poors called the May consumer price index "a useless report.
"We're still hugging the bottom of the (inflation) range," he said. "It has no implications for policy for the bank at the moment."
Gasoline prices rose, on average, 2.1 per cent in May, the second increase in as many months. But consumers still paid 6.3 per cent less for gasoline last month than they did in May 1997.
Mortgage interest costs and computer prices were also down compared with a year ago.
The price of accommodations for travellers, meanwhile, jumped 14 per cent in May over April.
"Happily for us, demand has grown," said Debra Ward of the Tourism Industry Association of Canada.
"We've got a real favorable exchange rate against the U.S. and you're getting more Americans and more Canadians staying. That's put some pressure up (on room rates)."
Fresh fruit prices rose 8.5 per cent in May, reflecting continued disruptions in U.S. supply due to El Nino-related weather disturbances south of the border.
The natural gas index was also up 2.7 per cent, primarily due to rate increases in Ontario. Ontario rates increased because of higher costs for transporting natural gas from Western Canada.
Women's clothing cost 2.6 per cent less in May following a similar 2.4 per cent decline in April. Women's clothing typically shows a modest decline in May.
The price of bakery goods fell by 3.2 per cent, while the air transportation index also fell 1.9 per cent, mainly due to lower fares being offered on many international flights.
Respect hardest to come by at home, VSE president says
Vancouver Sun
The Vancouver Stock Exchange wants some respect -- and that's hardest to come by here at home, says Michael Johnson, president and chief executive officer.
"To be candid, our largest problems today are within this room, this city and this province," Johnson told the annual general meeting of the Vancouver Board of Trade on Thursday.
"Like you, we are working to build Vancouver and British Columbia with integrity and determination. We are doing a good job and people need to know that. The past perceptions are not our present reality or part of our future."
Arguing that the exchange is fulfilling its mission to be "an honest, fair and efficient venture capital market," Johnson exhorted board members to "stand up and defend the VSE."
"Do not let our critics go unanswered, with vision blurred by events of years ago."
The exchange has been making progress, he said, because "we are diligently, and with a high degree of objectivity enforcing the rules guiding practices in the VSE's market."
"Let's be frank, this is tough medicine and it has required courage and conviction from the exchange and its member firms," he said. "Applying punishment is never easy, but it is necessary."
During the past year, Johnson said, the VSE performed "exceptionally well," despite three major challenges -- the financial crisis in Asia; a loss of confidence in the mining sector in the wake of the Bre-X scandal, and a decline in gold prices, which also hurt the the mining industry.
"The past year has demonstrated that the VSE and its members cannot remain static in the rapidly changing financial world," he said.
"Together, the exchange and its members must seek new opportunities and ways in which we can both maintain and expand our business base.
"This has not been easy in the past year, when we have been seriously affected by events over which we have no control."
Johnson cited figures to argue that the exchange is an "essential part" of Vancouver's emergence as an international financial centre on the Pacific Rim:
- During the past year, more than 50 new companies listed on the VSE.
- $1.4 billion in new financing was raised.
- The market capitalization of VSE listed companies reached $9.4 billion.
- 29 companies graduated to senior exchanges. |
